Three Reasons Why a Universal Basic Income Stimulus is Better than Wage Subsidies

Posted by Geoff Simmons3554tp on March 23, 2020

A lot can happen in a week. Last Monday I was calling for a UBI stimulus of $1,000 per month for everyone 18-65 as long as the Corona crisis lasts. On Tuesday, the Government launched its own stimulus package, which put wage subsidies front and centre. It was a solid package, given what we knew at the time. But things can change quickly in a pandemic.

In only a few days, the potential scale of the crisis deepened, mostly in terms of how long it may last. By Thursday, calls for UBI were gaining traction in the United States among politicians on both the left and the right. Our own Bernard Hickey even out-bid me by calling for a UBI equivalent to NZ Super (roughly $15,000 per annum) for everyone, funded by the Reserve Bank (think fancy money printing).

I generally applaud the Government’s handling of the crisis. While transparency could be improved, it seems it is listening to the experts and acting on their advice. However, I now believe more than ever that UBI is a better way forward than wage subsidies and a benefit hike. Here are 3 reasons why:

1. How Long Will This Last?

As with any pandemic, it is early days and there is a lot we don’t know. Without comprehensive testing, we don’t know the true rate of infection and therefore the true percentage of serious cases. We also don’t know how much our mitigating measures might help reduce the severity of the crisis. Will the pandemic be short and sharp? Or continued but contained?

If we have community spread, the latest advice from the Imperial College Report is that the best we can expect to achieve is to reduce the pandemic into smaller waves of infections. This can be achieved by alternating between harsher lockdowns – perhaps in certain parts of the country at a time – with less stringent controls like we have now.

The upshot of this approach is that, while we could hopefully keep our health system functioning, we could be dealing with this disease for the next 18 months. The package the Government announced on Monday is designed to deal with the next 2–3 months maximum.

It is terrible to say, but the reality is that Government simply cannot support businesses and jobs with wage subsidies for 18 months. Further support would simply be throwing good money after bad. Some businesses will sadly go under, others will go into hibernation. Many jobs will be lost.

UBI would provide a basic level of security to everyone during this difficult time. More than 50% of renters and young people already lived paycheck to paycheck before this crisis. The UBI will keep people spending, and ultimately help many businesses stay open.

2. We Are all in the Gig Economy Now

One oft-cited argument in favour of UBI is that the economy is changing. We are entering the gig economy, in which careers and jobs for life will be no more. People will move in and out of work. They will need support while they retrain and or start businesses.

With Coronavirus the future is here, now. The gig economy is upon us.

There is plenty of work to do out there, just not in the usual places. Supermarkets and chemists are struggling to keep up with demand. We have a massive harvest that needs picking but a shortage of the migrant workers who normally do the work. I expect the Government will also seize this opportunity to use any spare labour to pursue some of its policy goals. For example, I expect this winter will see lots of job opportunities planting native trees on erosion-prone land.

You might be thinking that you wouldn’t be willing to work for what they pay in those industries. UBI will ensure that people get a decent income overall, and that people who work are better off than those that don’t.

We are facing 18 months of uncertainty. We need people to muck in and move to where the work is. UBI encourages that. The existing government solutions (wage subsidies and a benefit boost) do not.

Wage subsidies simply keep people where the work isn’t. Benefits penalise working because people lose their benefits when they work and are often no better off. UBI doesn’t penalise work. When people on UBI work, they keep both their income and UBI. UBI encourages work and boosts incomes.

3. People and Incomes Matter – not Jobs or Businesses

Crises like this force us to think really hard about our priorities. Money isn’t a problem because government debt is low, and the crisis is so large the Reserve Bank will start purchasing Government bonds (basically printing money). But we still have to think hard about what we value and what we want to invest in.

What really matters is people. And to people, having an income is the key. Jobs and businesses are important, but income trumps all of that. So that is what we should focus on. Maintaining jobs and businesses until “business-as-usual” returns will be very expensive. Frankly, we don’t know whether business-as-usual will return at all, let alone when.

Businesses will fail, but their assets will get picked up and used by others. This is the creative destruction that keeps our economy improving. We mustn’t turn this off for 18 months in the hope that we can simply return to the status quo. What we must do is ensure that creative destruction doesn’t impact too heavily on people’s lives.

A common criticism of UBI is that the rich get it too. Yes, they would. Targeted support is complex to administer and just leads to more bureaucracy and bureaucrats. The fact is that everyone is or will be affected by this crisis. So we should give up the pretence of being able to target support effectively and help everyone.